Brexit deal on a knife edge but talks continue ahead of EU summit

Efforts are continuing to hammer out a Brexit deal Thursday as European Union leaders gather for a summit at which they could approve a tentative withdrawal agreement.

But that could prove very difficult with the Democratic Unionist Party (DUP), a group of politicians in Northern Ireland which are allied with the ruling U.K. Conservative Party, announcing that it couldn’t support the deal as it stands.

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That announcement sent sterling plunging more than 0.4% on Thursday morning, to 1.2765 against the dollar after trading near 1.2819.

The DUP said in a statement that it’s unhappy with proposed customs and consent arrangements (designed to give Northern Ireland a say over its relationship with the EU post-Brexit) within the current proposals. The DUP has repeatedly opposed any plans that would see it treated differently from the U.K. after Brexit.

The U.K. government, which does not have a majority in the British Parliament, needs the DUP’s support (and votes) if it is to have a chance to get a deal over the line when (and if) Parliament votes on Saturday to approve any deal.

A spokeswoman for the European Commission said that U.K. Prime Minister Boris Johnson and Commission President Jean-Claude Juncker had spoken this morning and that talks were continuing between both sides. She also reiterated that the EU wants a deal.

Finding an agreement that the DUP (unionists that want to stay aligned with the U.K.) can tolerate and be worked on by nationalists and unionists in Northern Ireland is not easy, analysts say. All sides are wary of jeopardizing the Good Friday Agreement, the delicate peace process between Northern Ireland and the Republic.

“It’s extremely difficult. Both communities (unionists and nationalists) in Northern Ireland have to agree to the long-term solution but the problem is that Brexit means that the status quo will change,” Fabian Zuleeg, chief executive and chief economist at the European Policy Centre, told CNBC on Thursday.

“So there has to be some form of mechanism to involve the communities but that’s highly disputed, so it will continue to be one of the major issues in getting a deal,” he told CNBC’s Willem Marx.

Roller-coaster ride

Brexit talks on Wednesday resembled a roller-coaster ride with reports at times suggesting a deal had been reached only to be countered with others suggesting that stumbling blocks had been run into. This caused volatile moves in sterling and U.K. stocks.

As talks continued into Wednesday night, EU officials and leaders appeared positive that an agreement was possible, even as time was fast running out before an EU leaders summit in Brussels Thursday.

Michel Barnier, the EU’s chief Brexit negotiator, said there had been “good progress” in talks Wednesday evening and European Council President Donald Tusk said that “the basic foundations of this agreement are ready and theoretically we could accept a deal.” German Chancellor Angela Merkel also said she was slightly more optimistic a deal could be reached.

Even if the EU agrees to a deal, Prime Minister Johnson still needs to gain domestic support for an agreement from the U.K. Parliament, which could happen in a special parliamentary session on Saturday.

‘Fundamental shift’

Hopes for a Brexit deal were revived in early October when the British government tabled new proposals to circumvent the contentious Irish “backstop” — an insurance policy in the original Brexit deal designed to prevent a hard border between Northern Ireland and the Republic of Ireland.

The backstop had been very unpopular among Brexiteers and the DUP who did not want Northern Ireland to be separated from the rest of the U.K. As such, Britain proposed new plans that would see Northern Ireland retain elements of EU single market membership but leave the customs union, necessitating customs checks.

To ensure the Irish border remained open, Britain suggested customs checks could take place away from the border but EU officials were skeptical about the practicality of those arrangements.

As talks continued this week, Britain was reported to have made more concessions over Northern Ireland, however, including suggesting that a customs border could be created down the Irish Sea — something that appeared to unnerve the DUP.

On Wednesday, the European Parliament’s chief Brexit official, Guy Verhofstadt, said there had been a positive change in the U.K.’s position. Still, he recognized any deal still needs approval by the U.K. Parliament — and a majority of U.K. lawmakers rejected the last Brexit deal on offer three times over.

“There has been a fundamental shift (compared to) a week ago, where before, the proposals of Mr (Boris) Johnson were absolutely unacceptable,” Verhofstadt told reporters Wednesday.

″(But) there has been a fundamental shift, that is clear. So, the question is now, can the outstanding issues on customs be resolved? And then the next step — but that is not in this parliament, it is in another parliament in Britain — is there a majority in the House of Commons for it?,” he added.

If EU leaders can agree a Brexit deal, Johnson will then take it to the U.K. Parliament on Saturday. There is no guarantee that a majority of lawmakers will back the deal, however, with hard Brexiteers and Remain lawmakers poles apart on whether to back the deal or risk a no-deal Brexit on October 31.

If no deal is agreed on Saturday, Johnson has been legally bound by his parliamentary colleagues to ask the EU for an extension to the departure date. But the prime minister has said the U.K. must leave the EU on Oct. 31 come what may.